Where will the wind blow? Government’s dispute over offshore wind farms

The discussion on the Polish renewable energy sector (RES) has not died down after the small amendment to the RES act entered into force. Meanwhile a new dispute on the extensive amendment to the Act has emerged in the government. The bone of contention is offshore wind farms – writes Bartłomiej Sawicki editor at BiznesAlert.pl.

Aftermath of the small RES act amendment

The dispute is not between market participants but between members of the Cabinet. According to the Ministry of Economic Development (MED), the amendment to the RES act the Ministry of Energy is working on, may halt the development of offshore wind energy, which, while expensive, is a stable source of power.

President Andrzej Duda signed the small amendment to the Act on renewable energy sources (http://biznesalert.com/amendment-renewable-energy-act-signed-president/). The amendment eliminates the fixed rate of the so-called alternative fee, which today is worth PLN 300.03 per MWh. Instead, it will be linked with the market price of energy origin certificates for specified RES, i.e. the so-called green and blue certificates. The fee will equal to 125% of the average price of the certificates in the previous year, but it cannot be higher than PLN 300,03 per MWh.

The sector believes that the new regulation will cause bankruptcy of the private wind farms sector and will benefit large energy companies, which will be able to fulfill their RES requirements but not via direct contracts with green energy sellers, but via, e.g. paying the alternative fee, which will be significantly lower. Some of the problems, which, to a large degree, stem from haste and lack of consultations between the ministries or with the sector, could be solved by an amendment to the RES act prepared by the ministry. Such a regulation could introduce a more extensive reform of the green energy sector. The chances that the proposed act will be processed efficiently are going down because there are a lot of differences in the government on its content and the energy sources it should promote.

Extensive RES amendment – a return to the past

The Ministry of Energy is working on the so-called extensive RES act amendment, which will reinstate some of the regulations from before the amendment that had been introduced in 2016. This pertains to, among others, the previous taxation model for windmills. The current regulation is in line with the Construction law, which treats the entire installation as a construction, including the turbine and sails, which constitute about 85-90% of all investment expenses. The ministry proposed to go back to the previous definition of a ‘construction’, which encompasses only the power plant’s construction elements (e.g. foundation and tower), which are least capital intensive.

There will be no changes to the regulations on the distance between windmills and buildings. The required distance will still be 9 times the height of the windmill with all of its elements. However, the law will be made more flexible. If the inhabitants agree, it will be possible to construct new housing closer to the wind farms despite the above regulation.

Ministry of Economic Development defends offshore windmills

The project has been submitted for consultations at the ministries. A significant amount of comments is about editing and providing more details, but they do not change the essence of the amendment. An exception was made by the MED, which submitted a letter to the Ministry of Energy criticizing the regulations. MED claims that it will stop the development of offshore wind farms.

MED stressed that article 75, which determines the terms under which power producers can participate in an auction, “constitutes a significant investment barrier for installations that use offshore wind energy. Thus, it may stop the development of offshore wind energy.” The ministry’s opinion was presented by Vice-Minister Jadwiga Emilewicz.

According to the ministry, the proposed changes will allow the producers of green energy to participate in an auction on the basis of a legal construction permit, instead of “an environmental impact permit and a legal permission to build and use artificial islands, constructions and appliances in the Polish marine areas for businesses located in the exclusive economic zone, which are currently required. Regulations on decisions and permits written specifically for investments in offshore wind farms have been removed from article 75.”

In the ministry’s opinion the development of the sector will be halted because the investors who currently have legal environmental impact decisions will not be allowed to participate in auctions. Those projects will be halted, which means the issued legal permits for constructing offshore wind farms and the signed grid connection agreements will lose their validity.

Additionally, the MED believes the proposed changes will significantly increase investment risk because they force the investor to incur significant costs for geotechnical research and offshore wind farm design before the conditions for financing of the investment are set.

The Ministry of Economic Development also reminds that the acquisition of a legal environmental impact decision confirms that the project does not have a significant bearing on the environment, society and other users of marine areas. Therefore, its issuance confirms that the project can be pursued in line with the terms that more and more often constitute an obstacle to the investment.

The ministry also argues that in order to acquire a decision on environmental impact the investor needs to go through “a long and very expensive marine research and analysis process, which costs tens of millions of Zlotys and which takes about 3 years.” This means “the requirement to acquire a construction permit without determining the price of energy at an auction before the most costly stage, which also sets out the final parameters of the project, increases investment risk disproportionately in comparison to other RES technologies and may block the development of offshore wind farms in the country.”

Sector’s opinion on the changes

The RES sector expressed its shy optimism about the auction mechanism that will be introduced thanks to the amendment. It praised the regulations on auctions for wind farms. This is related to the division of baskets on the basis of which capacities generated by specific technologies will be bought.

The ministry’s concerns are important because – according to the sector – even if some of the regulations in the so-called proximity act are watered down, the onshore wind farm industry will not develop anyway. This act, however, does not pertain to offshore wind farms, which are becoming more popular in the context of Poland’s 2030 energy mix. In this context, the regulations that will limit the development of offshore wind farms raise doubts.

Last February, during a conference “Marine wind energy as a driving force behind Poland’s economy,” Michał Michalski board member at Polenergia, one of two companies that want to invest in offshore energy, said the company was considering which technology to choose. He pointed out that in the Polish support system for RES there was no place for offshore wind farms in the auction system.

The Ministry of Economic Development submitted amendments and suggestions that should solve this problem. The construction of Polenergia’s wind farm may start in 2020 and be commenced in 2022. If this is to happen, the auctions will have to take place between 2019 and 2020. According to Michalski, the RES act did not have a lot of content. The operator of the other project on the Baltic Sea, PGE, believes their project may be commenced around 2025.

Currently, two offshore wind farms projects are pursued in Poland. Their total capacity is 2.2 GW. The projects are PGE Energia Odnawialna and Polenergia Bałtyk II and Polenergia Bałtyk III. In July Bałtyk III received the first environmental impact decision from the Regional Directorate of Environmental Protection in Gdańsk.

According to PGE, offshore wind energy is unpredictable and the company is yet to conduct the time-consuming environmental studies. At the same time the creators of the amendment to the RES act can still improve the predictability of the company’s business because today – according to the decision makers at PGE – it is unpredictable, but prospective. PGE is also not interested in taking over other projects or in letting other entities join its plans.

There is no shortage of companies eager to invest in projects in the Baltic sea. The potential investors include Denmark’s DONG Energy and Norway’s Statoil. It seems the ministries need to reach a compromise to also enable foreign companies to invest in Poland’s offshore wind energy. It is also essential to include the sector representatives in social consultations, which did not take place when the small RES amendment was being prepared. The biggest obstacle would be caused by a long-standing feud between the ministries, which would not do any good to the RES sector or the work on Poland’s energy mix.

Ministry of Economic Development’s remarks on RES

At the same time the Ministry of Economic Development submitted their remarks to the Ministry of Energy’s draft regulation on RES requirements for 2018. According to the draft, the requirement to purchase green certificates will increase from 15.4 to 17.5%. The duty to buy energy origin certificates from biogas, i.e. blue certificates will be decreased to 0.5 from 0.6% in 2017. The total RES duty in 2018 will be at 18%. The RES act says that the demand for certificates should not be smaller than 19.35% of the final energy. However, the energy minister actually lowered that requirement thanks to this regulation.

Yet, according to Witold Słowik MED Vice-Minister “the quota of the total electricity production that stems from writing off energy certificates that confirm the production of electricity from RES should be at 20%.” In his written opinion, Słowik stressed that the Impact Assessment of the Regulation does not explain what real benefits (savings) it will give to the consumers of electricity, who in the end will pay for the requirement to buy the certificates and present them for write-offs.”

The Ministry of Economic Development stressed that the oversupply of green certificates has already cost the sector about PLN 3 bn. At the same time, when the sector’s investors took out loans, they based their decisions on forecasts from a few years back, which assumed the increase of certificates’ value. They borrowed the money on that assumption.

The ministry motioned for a completely different Impact Assessment of the Regulation. The updated version should include the calculations of costs of the implemented changes, explain the benefits for energy consumers resulting from the lower amount of energy origin certificates that will need to be written off in 2018 (and which are lower in numbers than the RES act requires) and also set out the costs the RES sector will have to bear. The ministry also asked for information on the Energy Ministry’s estimates on the increase in electricity bills for an average household in 2018 in relation to 2017. The Chancellery of the Prime Minister also asked for the regulation to be more substantive.

The Ministry of Economic Development’s actions may delay the work on the RES amendment, but they may also support those voices which did not have a chance to speak during the legislation process for the so-called small RES amendment. The dispute on the shape of the RES market shows yet again how the government is arguing over the shape of the energy sector and on who and how should manage it. The current dispute takes place between ministries located on the Wspólna Street and Trzy Krzyże Square, but the ministry from the Wawelska Street, i.e. Ministry of the Environment, is yet another player eager to frequent the battlefield.